Sunday, March 26, 2006

My Trading Style - Overview

In response to reader mail, this post is a brief overview of key ingredients in my trading management.

Currently, my trading is focused primarily on stage 2 stocks. This is my bread and butter as I am a bull by nature. My repertoire of stocks is mainly focused on Nasdaq stocks, however, recently I’ve had success with a couple of NYSE stocks. I prefer Nasdaq level II screens for intraday trading because it allows me to place my bid at the same level as the proprietary traders of the Wall Street firms. My preference is for highly liquid stocks in the $20 - $100 range that trade in an orderly fashion. I avoid charts with too many gaps and/or masses of overlapping candles. Anyone, who’s been reading this blog regularly over a period of time, is aware by now that my favorite sector is semiconductors.

Nightly Preparation:

Using, I have created a folder for each major tech sector where I save updated charts of all stocks that meet my criteria outlined above. I review all of these charts nightly to look for developing patterns, trends, consolidations, etc. I take note of the charts which have potential to move in the following trading session and I outline which entry price would be the best entry point ie. a breakout price and a pullback to support price (breakouts on high volume are my favorite setup). I set alerts for these trade setups in eSignal. I also review late day scans for any potential breakouts/breakdowns and add alerts for these as well. Finally, I run a few of my own pre-defined scans and add alerts as required. I then plot key support/resistance lines, pivot points and trendlines on my eSiganl charts for the stocks I plan to trade the following day.

I also check for stocks trading up or down in AH (after hours). AH movers are especially important when they are bellwether as they have the potential to move the entire market or sector.

Before the market opens I review for important news that will move the market or individual names. Upgrades/downgrades, especially by notable firms, are important. I also check the trade counts/rates for stock moving in the pre-market to see if there are any interesting gap-up plays. Gap-ups and gap downs are usually good during the early phase of earnings season and/or a strong stage two market rally, however, they have not been a big part of my trading strategy since we’ve been in this narrow Nasdaq trading channel. Finally, I look at the NDX and S&P futures and the QQQQ intraday support and resistance to see how the market will open and try to get some hints as to direction.

Trading Tools:

Here is a list of the trading tools and software I use:

  • eSignal – This is used as my main trading platform to track charts, level II, time and sales, etc.

  • Interactive Brokers – Execution – (commissions are cheap – half a penny per share with a 1 dollar minimum per trade)
N.B. I don’t believe in fixed commission fees for day trading even though most of these firms offer software and news services as part of the package. In day trading you have to be in control of order sizing to be able to manage your risk. Fixed commissions force you to increase your size and are therefore, hazardous to your trading. Furthermore, the charting software incorporated in the fixed fee commission packages is often times second rate when compared to the better pay for service platforms.
  • – Best scanning tool on the market because of the built in filters. (refer to link on my right side panel)

  • Daytrade – Excellent educational and stock picking service for day and swing traders, a must for beginners. (refer to link in my upper right hand side panel)

  • – Real time Extra. – for intraday scanning and creating folders of potential intraday trade setups.

  • – market moving news

Key Ingredients to my chart anaylsis:

Price, volume, candlestick patterns, support and resistance, moving averages, ADX (momentum), and trendlines. I evaluate all of these ingredients on the daily timeframe. On the intraday timesframe, I do not always look at the ADX. My most used timeframes for intraday trading are the 5 and 15 minute views. I always validate a trade setup on 2-3 different time frames before pulling the trigger.

Three Day Consolidation Breakout - My Criteria

I will elaborate more on individual trade setups in future posts. Here is an example of my criteria for a three day consolidation pattern breakout which I used successfully several times this past week, most notably with OVTI and NEW.

I look for stocks that are:
1. In an uptrend ( at least one higher low and one higher high) but preferably a stage two uptrend as these setups have a higher degree of success;
2. At least three days of consolidation in a narrow trading range preferably at the uppermost level of the recent trading range;
3. lower volume during the consolidation period;
4. An attempt to break out the day prior to the actual breakout - this usually is a retest of the highs of the consolidation range;
5. And finally, I prefer when the stock closes at or near its highs of the consolidation range on the eve of the the actual breakout. However, this last point is not always met and does not preclude me from taking the trade.

When the breakout occurs, it is accompanied by high volume.

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